The pharmaceutical outsourcing industry has experienced a shift from the more traditional outsourcing models to strategic partnerships.
Large pharmaceutical companies are looking to contract research organizations (CROs) to provide cost efficiencies and productivity in clinical development and are rewarding their CROs with broader and longer-term contractual agreements. Single study outsourcing models have evolved into more in-depth relationships between sponsors and CROs, reducing set-up costs and creating business alignment, long-term efficiencies and performance improvements.
In recent years, the largest pharmaceutical organizations are increasingly using strategic outsourcing models to take full advantage of their CRO’s core competencies and realize their own enterprise-wide strategic goals. Small- and medium-sized pharmaceutical and biotechnology companies have not yet leveraged this strategy on a broad scale, and as a result, represent an area for growth in the outsourcing arena. In many ways their objectives are the same as those of large pharmaceutical companies: to access the CRO’s best team and obtain high-quality deliverables in a timely manner, competitive pricing, and efficiencies of scale.
The movement towards evidence-based medicine continues, with drug companies increasingly expected to provide new treatments that provide significant improvements over existing therapies, and at a reasonable cost. They also face increasingly aggressive competition from generics, and now biosimilars (particularly with the US approval pathway now established), which is also requiring new strategies and often proprietary technology to achieve effective lifecycle management. In addition, demand growth is now occurring in emerging markets, rather than mature economies, and low-cost drugs are expected. Outsourcing at the earliest development stages to CROs with bioanalytical expertise is also helping drug manufacturers identify the most promising candidates much earlier, thus reducing overall R&D expenditures.
According to a new 2016 Nice Insight CRO and CDMO Outsourcing survey of 1,173 industry representatives from pharma and biotech companies, spending for outsourced services takes a big leap compared to previous years.
The three major trends characterizing the state of industry outsourcing this year are:
- Continued growth in contract service provider consolidation.
- Escalating spending by pharmaceutical and biotech companies for outsourcing services.
- A growing preference by big pharma, big biotech and others for preferred provider and strategic partner relationships.
The surveys reveals that more than three quarters (77%) of pharma/ biotech industry companies currently outsource services or operations to contract development and manufacturing organizations (CDMOs), contract manufacturing organizations (CMOs), and contract research organizations (CROs), with 30% of those companies outsourcing to CDMOs and/or CMOs. Only 23% do not currently outsource these services but are in the process of evaluating CDMOs and CMOs within the next 24 months.
More than half of big pharma and emerging pharma companies currently outsource to both CDMOs/CMOs and CROs. Small pharma and biotech companies are the ones most likely to need outsourcing services within the next 24 months (37%). Most companies (69%) that currently outsource services to CDMOs or CMOs indicated that the number of these contractors they work with is likely to increase in the next three years, and for only 1%, the number is likely to decrease.
Consolidation Mania: The End of the Line?
Consolidation among industry outsourcing organizations, paralleling the merger and acquisition trend among pharmaceutical and biotechnology companies, has been a major trend in recent years as service providers strive to fortify their capabilities to meet increasing competition and challenges. They are also repositioning their business profiles through divestitures of specific product lines or business units.
In the last few years, Patheon acquired DSM’s pharmaceutical products business, Gallus Biopharmaceuticals, and Agere Pharmaceuticals; Catalent purchased Pharmapak Technologies, Redwood Bioscience, and Micron Technologies; Cambridge Major Laboratories merged with AAIPharma and Piramal Enterprises acquired Coldstream Laboratories. It will be interesting to see whether these consolidated companies are able to fully integrate their services and improve their performance.
Interestingly, in the drug product contract services industry, only 32 of the industry’s providers account for 67% of industry revenues.
Interviews with senior executives of large biotech and pharma companies indicate that most plan to continue their strategy of investing in acquisitions, mergers, and consolidation, and many intend to divest assets this year. The strong wave of consolidations has been driven by the desire for contract services companies to offer integrated, end-to-end solutions, or to enter new market segments.
However, according to industry thought leader Jim Miller, the consolidation process, and pace has recently slowed because there is a dearth of remaining acquisition targets. He says that most of the current deals are smaller transactions where the buyer fills technology gaps rather than gains broad capabilities or expands its geographic footprint.
To compete favorably in this fiercely competitive marketplace, contract services must be able to provide real value, continually anticipate the changing needs of their customers, and adjust their offerings accordingly. CDMOs with expertise in pre-formulation and formulation development, and the ability to provide clinical trial supplies and achieve seamless scale-up and transfer for commercial manufacturing have an advantage. Industry companies will also seek service providers with specialized capabilities, such as innovative dosage form technologies, advanced technical capabilities and automation, and the ability to produce potent compounds and controlled substances.
Increased CRO Outsourcing Spending
According to the Nice Insight surveys on 2016 outsourcing trends, this year saw another big jump in expenditure for contract research, development and manufacturing organizations, maintaining the continuously escalating outsourcing spend over the past five years. The majority (43%) of companies spent $51 million to $100 million USD on outsourcing and another 28% spent more than $100 million. Compared to the previous year, the 2015 Nice Insight survey found that the vast majority (62%) of CMOs spent $10M to $50M per year on outsourcing and only 23% spent more than $50M. Three-quarters of the 2016 survey respondents said this expenditure is likely to increase in the next five years.
What’s driving the increased use of contract services? Part of the reason pharma and biopharma companies of all sizes are increasingly relying on outsourcing providers is to help deal with cost pressures and speed time to market in a highly competitive marketplace. Another significant reason is access to needed scientific and technical expertise that is lacking in-house. In particular, advanced expertise is needed for the growing trend of complex specialized drugs and immunotherapies for smaller populations, as well as for rare diseases, all of which require extremely high costs.
Other key drivers are the reduced need for capital investment, the increasing potency of many new candidates, access to state-of-the-art production capabilities, cost-cutting, and the need for specialized services.